The U.S. Treasury Department officially named China a currency manipulator after the Peoples Bank of China devalued the yuan in response to new tariffs that were imposed by the U.S. and set to take effect on Sept. 1, 2019.
While mostly a symbolic move, the naming opened the door for the Trump administration to consult with the International Monetary Fund (IMF) to eliminate any unfair advantage China's currency moves had given the country.
- Investors were accustomed to the stability of the yuan against the U.S. dollar.
- In 2019, China devalued its currency in response to new tariffs that the Trump administration planned to impose.
- China allowed its currency value to fall below the 7:1 peg it had maintained since 2015.
- As a result, the DJIA fell 2.9%, its worse decline of 2019 to date.
- The Trump administration viewed China's action as artificial manipulation of its currency.
China Devalues Yuan
In August of 2019, China allowed the yuan to fall below the 7:1 yuan to dollar peg it had maintained since 2015. This action set off a day of intense selling in global markets. In the U.S., the Dow Jones Industrial Average (DJIA) fell 2.9%, its worst daily decline all year.
The U.S. Dept. of the Treasury stated in an Aug. 5, 2019, press release:
China has a long history of facilitating an undervalued currency through protracted, large-scale intervention in the foreign exchange market. In recent days, China has taken concrete steps to devalue its currency, while maintaining substantial foreign exchange reserves despite active use of such tools in the past. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of China’s currency devaluation is to gain an unfair competitive advantage in international trade.
U.S. Treasury Secretary Mnuchin cited the Omnibus Trade and Competitiveness Act of 1988, which requires the Secretary of the Treasury to analyze the exchange rate policies of other countries.
It was incumbent on the Secretary to consider whether countries manipulate their currency exchange rates against the U. S. dollar to prevent effective balance of payments adjustments or to gain an unfair competitive advantage in international trade.
U.S. Applies Manipulation Label
This was the first time the U.S. had labeled China a currency manipulator since 1994. The announcement came less than three months after the publication of the Treasury's semiannual currency report, "Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States." China wasn't designated a currency manipulator in the report.
The U.S. Treasury uses three criteria to decide whether to apply the designation of currency manipulator to countries. They must be or have:
- Actively intervening in their currency markets
- Large trade surpluses with the U.S.
- Large overall current-account surpluses
Tariffs can have unwanted effects. When China devalued the yuan in response to newly announced U.S. tariffs, the DJIA closed Monday, Aug. 5, 2019, down 767.27 points (2.9%). During the trading session, it was down as much as 961.63.
The Ongoing Trade War
The designation was the latest salvo in the U.S. China trade war, which had intensified even after the two economic powerhouses met for negotiations in Shanghai in July 2019.
As soon as those talks ended, President Trump announced via Twitter that the U.S. would apply 10% tariffs on an additional $300 billion worth of Chinese imports on September 1st, 2019.
What Does It Mean to Devalue a Currency?
It means that a country takes deliberate action to lower the value of its currency relative to another country (or to a group of countries).
Why Did China Devalue the Yuan?
China took this step to reduce the cost of its products for international buyers and boost demand for them. This was in response to the Trump administration's plan to impose new tariffs on $300 billion more of Chinese goods (which raised their cost to U.S. buyers).
What's a Currency Peg?
A currency peg is a fixed rate of exchange that a country commits to and maintains using its various economic policies. Pegging a currency can promote currency stability and trade. Over a dozen countries peg their currencies to the U.S. dollar.